UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2021
Or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File No. 1-6639

MAGELLAN HEALTH, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	58-1076937 (IRS Employer Identification No.)
4801 E. Washington Street Phoenix, Arizona (Address of principal executive offices)	85034 (Zip code)

(800) 642-1716

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	MGLN	The NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange

Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of Magellan Health, Inc.’s common stock outstanding as of March 31, 2021 was 26,126,570.

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)



	December 31,		March 31,
	2020		2021
			(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ($49,227 and $75,458 restricted at December 31, 2020 and March 31, 2021, respectively)	$	1,144,450	$	456,309
Accounts receivable, net		743,502		793,504
Short-term investments ($88,867 and $74,312 restricted at December 31, 2020 and March 31, 2021, respectively)		140,847		625,600
Pharmaceutical inventory		43,334		46,389
Other current assets ($43,547 and $51,511 restricted at December 31, 2020 and March 31, 2021, respectively)		84,264		101,462
Total Current Assets		2,156,397		2,023,264
Property and equipment, net		136,739		142,084
Long-term investments ($1,026 and $2,615 restricted at December 31, 2020 and March 31, 2021, respectively)		2,612		4,830
Deferred income taxes		1,842		921
Other long-term assets		108,797		119,947
Goodwill		873,779		873,830
Other intangible assets, net		79,689		71,631
Total Assets	$	3,359,855	$	3,236,507
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	137,380	$	149,760
Accrued liabilities		354,906		266,217
Medical claims payable		111,851		116,580
Other medical liabilities		126,921		123,109
Current debt, finance lease and deferred financing obligations		6,521		6,543
Total Current Liabilities		737,579		662,209
Long-term debt, finance lease and deferred financing obligations		631,855		526,682
Deferred income taxes		7,102		13,602
Tax contingencies		11,002		11,867
Deferred credits and other long-term liabilities		69,283		79,276
Total Liabilities		1,456,821		1,293,636
Redeemable non-controlling interest		33,062		33,303
Stockholder's Equity:
Preferred stock, par value $.01 per share
Authorized—10,000 shares at December 31, 2020 and March 31, 2021-Issued and outstanding-none		—		—
Common stock, par value $.01 per share
Authorized—100,000 shares at December 31, 2020 and March 31, 2021-Issued and outstanding-55,549 and 25,887 shares at December 31, 2020, respectively, and 55,789 and 26,127 shares at March 31, 2021, respectively		555		558
Other Stockholders’ Equity:
Additional paid-in capital		1,477,219		1,488,975
Retained earnings		1,857,130		1,884,957
Accumulated other comprehensive loss		(205)		(195)
Treasury stock, at cost, 29,662 and 29,662 shares at December 31, 2020 and March 31, 2021, respectively		(1,464,727)		(1,464,727)
Total Stockholders’ Equity		1,869,972		1,909,568
Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity	$	3,359,855	$	3,236,507

See accompanying notes to consolidated financial statements.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended
	March 31,
	2020		2021
Net revenue:
Managed care and other	$	553,168	$	626,076
PBM		569,211		535,573
Total net revenue		1,122,379		1,161,649
Costs, expenses and other income:
Cost of care		349,108		379,191
Cost of goods sold		533,241		492,370
Direct service costs and other operating expenses (1)		204,241		231,021
Legal matter settlement		—		(9,000)
Depreciation and amortization		23,358		21,417
Interest expense		8,958		6,426
Interest and other income		(1,219)		(341)
Special charges		—		1,151
Total costs, expenses and other income		1,117,687		1,122,235
Income from continuing operations before income taxes		4,692		39,414
Provision for income taxes		5,762		10,905
Net (loss) income from continuing operations		(1,070)		28,509
Income (loss) from discontinued operations, net of tax		19,320		(682)
Net income	$	18,250	$	27,827

Net (loss) income per common share:
Basic (See Note A)
Continuing operations	$	(0.04)	$	1.10
Discontinued operations		0.78		(0.03)
Consolidated operations	$	0.74	$	1.07
Diluted (See Note A)
Continuing operations	$	(0.04)	$	1.07
Discontinued operations		0.78		(0.03)
Consolidated operations	$	0.74	$	1.04
Other comprehensive income
Unrealized gains (losses) on available-for-sale securities (2)		(201)		10
Comprehensive income	$	18,049	$	27,837

(1)	Includes stock compensation expense of $5,797 and $7,057 for the three months ended March 31, 2020 and 2021, respectively.

(2)	Net of income tax (benefit) provision of $(67) and $3 for the three months ended March 31, 2020 and 2021, respectively.

See accompanying notes to consolidated financial statements.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)


												Accumulated
				Common Stock				Additional				Other		Total
	Common Stock				In Treasury			Paid in		Retained		Comprehensive		Stockholders’
	Shares	Amount		Shares		Amount		Capital		Earnings		(Loss) Income		Equity
Balance at December 31, 2019	54,285	$	543		(29,662)	$	(1,464,727)	$	1,386,616	$	1,475,207	$	144	$	1,397,783
Stock compensation expense	—		—		—		—		6,057		—		—		6,057
Exercise of stock options	216		2		—		—		11,261		—		—		11,263
Issuance of equity	130		1		—		—		(1,137)		—		—		(1,136)
Net income	—		—		—		—		—		18,250		—		18,250
Other comprehensive loss—other	—		—		—		—		—		—		(201)		(201)
Adoption of ASC 326	—		—		—		—		—		(413)		—		(413)
Balance at March 31, 2020	54,631	$	546		(29,662)	$	(1,464,727)	$	1,402,797	$	1,493,044	$	(57)	$	1,431,603

Balance at December 31, 2020	55,549	$	555		(29,662)	$	(1,464,727)	$	1,477,219	$	1,857,130	$	(205)	$	1,869,972
Stock compensation expense	—		—		—		—		7,057		—		—		7,057
Exercise of stock options	110		2		—		—		7,465		—		—		7,467
Issuance of equity	130		1		—		—		(2,766)		—		—		(2,765)
Net income	—		—		—		—		—		27,827		—		27,827
Other comprehensive income—other	—		—		—		—		—		—		10		10
Balance at March 31, 2021	55,789	$	558		(29,662)	$	(1,464,727)	$	1,488,975	$	1,884,957	$	(195)	$	1,909,568

See accompanying notes to consolidated financial statements.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31,

(Unaudited)


	2020		2021
Cash flows from operating activities:
Net income	$	18,250	$	27,827
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		28,684		21,417
Special charges		—		1,151
Non-cash interest expense		585		355
Non-cash stock compensation expense		6,057		7,057
Non-cash income tax provision		7,802		7,603
Non-cash accretion on investments		325		592
Changes in assets and liabilities, net of effects from acquisitions of businesses:
Accounts receivable, net		(33,291)		(50,013)
Pharmaceutical inventory		2,629		(3,055)
Other assets		(41,862)		(27,283)
Accounts payable and accrued liabilities		52,746		(76,183)
Medical claims payable and other medical liabilities		(13,622)		917
Tax contingencies		925		680
Deferred credits and other long-term liabilities		3,003		9,993
Other		(505)		1,067
Net cash provided by (used in) operating activities		31,726		(77,875)
Net cash provided by operating activities from discontinued operations		35,805		—
Net cash used in operating activities from continuing operations		(4,079)		(77,875)
Cash flows from investing activities:
Capital expenditures		(15,719)		(19,540)
Acquisitions and investments in businesses, net of cash acquired		(369)		(2,372)
Purchases of investments		(164,311)		(673,169)
Proceeds from maturities and sales of investments		152,394		185,619
Net cash used in investing activities		(28,005)		(509,462)
Net cash used in investing activities from discontinued operations		(19,154)		—
Net cash used in investing activities from continuing operations		(8,851)		(509,462)
Cash flows from financing activities:
Proceeds from borrowings on revolving line of credit		80,000		—
Proceeds from exercise of stock options		10,903		7,467
Payments on debt, finance lease and deferred financing obligations		(34,774)		(105,506)
Other		(1,136)		(2,765)
Net cash provided by (used in) financing activities		54,993		(100,804)
Net cash provided by financing activities from discontinued operations		—		—
Net cash provided by (used in) financing activities from continuing operations		54,993		(100,804)
Net increase (decrease) in cash and cash equivalents from continuing operations		42,063		(688,141)
Cash and cash equivalents at beginning of period		115,752		1,144,450
Cash and cash equivalents at end of period	$	157,815	$	456,309

Supplemental cash flow data:
Non-cash investing activities:
Assets acquired under finance leases and deferred financing obligations	$	3,599	$	—

See accompanying notes to consolidated financial statements.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

NOTE A—General

Basis of Presentation

The accompanying unaudited consolidated financial statements of Magellan Health, Inc., a Delaware corporation (“Magellan”), include Magellan and its subsidiaries (together with Magellan, the “Company”). The financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the Securities and Exchange Commission’s (the “SEC”) instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year. All significant intercompany accounts and transactions have been eliminated in consolidation.

On December 31, 2020, Magellan completed the sale of its Magellan Complete Care business (the “MCC Business”) to Molina Healthcare, Inc. (“Molina”), pursuant to a Stock and Asset Purchase Agreement, dated as of April 30, 2020, by and between the Company and Molina, for cash in the amount of $850 million plus closing adjustments of $158 million (subject to post-closing adjustments, if any), and the assumption by Molina of liabilities of the MCC Business (the “MCC Sale”). The MCC Business was the Company’s business of contracting with state Medicaid agencies and the U.S. Centers for Medicare and Medicaid Services to manage total medical benefits or long-term support services for Medicaid and dual eligible Medicaid and Medicare populations.

On January 4, 2021, the Company and Centene Corporation (“Centene”) entered into an Agreement of Plan of Merger (the “Merger Agreement”) by and among the Company, Centene, and Mayflower Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Centene (“Merger Sub”), pursuant to which, subject to the terms and conditions set forth therein, Merger Sub will merge with and into the Company, with the Company surviving such merger (the “Merger”) as a wholly-owned subsidiary of Centene. Pursuant to the Merger Agreement, each issued and outstanding share of the Company’s common stock will be automatically canceled and converted into the right to receive $95.00 in cash. The Company expects to complete the transaction in the second half of 2021.

The Merger has been approved by the Company’s board of directors, the Company’s stockholders and Centene’s board of directors. The completion of the Merger is subject to customary closing conditions, including, among others, the receipt of various regulatory approvals. For additional information on the Merger Agreement and the Merger, please refer to the Company’s Current Reports on Forms 8-K, filed with the SEC on January 4, 2021 and March 31, 2021, and our definitive proxy statement filed with the SEC on February 19, 2021 (the “Proxy Statement”). The Company cannot guarantee that the Merger will be completed on a timely basis or at all or that, if completed, it will be completed on the terms set forth in the Merger Agreement.

These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2020 and the notes thereto, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on February 26, 2021.

Business Overview

The Company provides managed care and pharmacy solutions for some of the most complex areas of healthcare. The Company offers innovative solutions that combine analytics, technology and clinical rigor to drive better decision making, positively impact members’ health outcomes and optimize the cost of care for the customers Magellan serves. The Company provides services to health plans and other managed care organizations (“MCOs”), employers, labor unions, various military and governmental agencies and third-party administrators (“TPAs”). Magellan operates three segments: Healthcare, Pharmacy Management and Corporate.

Healthcare Segment

The Healthcare Segment (“Healthcare”) customers include health plans, accountable care organizations

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

(“ACOs”), employers, the United States military and various federal government agencies for whom Magellan provides carve-out management services for (i) behavioral health, (ii) employee assistance plans (“EAP”) and (iii) other areas of specialty healthcare including diagnostic imaging, musculoskeletal management, cardiac and physical medicine. These management services can be applied broadly across commercial, Medicaid and Medicare populations, or on a more targeted basis for our health plans and ACO customers. The Behavioral & Specialty Health reporting unit also includes Magellan’s carve-out behavioral health contracts with various state Medicaid agencies, as well as certain provider assets that deliver primary care and behavioral healthcare services through an integrated approach.

Magellan’s coordination and management of these healthcare services are provided through its comprehensive network of medical and behavioral health professionals, clinics, hospitals, skilled nursing facilities, home care agencies and ancillary service providers. This network of credentialed providers is integrated with clinical and quality improvement programs to improve access to care and enhance the healthcare experience for individuals in need of care, while at the same time making the cost of these services more affordable for our customers. In addition to the Company’s provider assets where it provides treatment services in certain geographies, the Company also employs licensed behavioral health counselors to deliver non-medical counseling under certain government contracts.

The Company provides its Healthcare management services primarily through: (i) risk-based contractual arrangements, where the Company assumes all or a substantial portion of the responsibility for the cost of providing treatment services in exchange for a fixed per member per month (“PMPM”) fee, or (ii) administrative services only (“ASO”) contractual arrangements, where the Company provides services such as utilization review, claims administration and/or provider network management, but does not assume full responsibility for the cost of the treatment services, in exchange for an administrative fee and, in some instances, a gain share.

Pharmacy Management Segment

The Pharmacy Management segment (“Pharmacy Management”) is comprised of services that provide clinical and financial management of pharmaceuticals paid under both the medical and the pharmacy benefit. Pharmacy Management’s customer solutions include: (i) pharmacy benefit management (“PBM”) services, including pharmaceutical dispensing operations; (ii) pharmacy benefit administration (“PBA”) for state Medicaid and other government sponsored programs; (iii) clinical and formulary management programs; (iv) medical pharmacy management programs; and (v) programs for the integrated management of specialty drugs across both the medical and pharmacy benefit that treat complex conditions, regardless of site of service, method of delivery, or benefit reimbursement.

These services are available individually, in combination, or in a fully integrated manner. The Company markets its pharmacy management services to managed care organizations, employers, third party administrators, state governments, and other government agencies, exchanges, brokers and consultants. In addition, the Company will continue to upsell its pharmacy services to its existing customers and market its pharmacy solutions to the Healthcare customer base, including through integrated Pharmacy Management and Healthcare service offerings.

Pharmacy Management contracts with its customers for services using risk-based, gain share or ASO arrangements. In addition, Pharmacy Management provides services for most of the MCC business.

On May 11, 2020, the Company announced its decision to exit the Medicare Part D business at the end of 2020. Any activity related to Medicare Part D business reflected in the three months ended March 31, 2021 is related to final run-out of the 2020 Part D contract provision. The Company continues to retain its Medicare Employer Group Waiver Plan as well as full capabilities to serve the PBM needs of its existing and prospective Medicare customers.

Corporate

This segment of the Company is comprised primarily of amounts not allocated to the Healthcare and Pharmacy Management segments that are largely associated with costs related to being a publicly traded company.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

Summary of Significant Accounting Policies

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning in the first quarter of 2021. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company can include, among other things, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. In addition, the Company also makes estimates in relation to revenue recognition under Accounting Standard Codification 606 (“ASC 606”) which are explained in more detail in “Revenue Recognition” below. Actual results could differ from those estimates.

Revenue Recognition

Virtually all of the Company’s revenues are derived from business in North America. The following tables disaggregate our revenue for the three months ended March 31, 2020 and 2021 by major service line, type of customer and timing of revenue recognition (in thousands):


	Three Months Ended March 31, 2020
	Healthcare		Pharmacy Management		Elimination		Total
Major Service Lines
Behavioral & Specialty Health
Risk-based, non-EAP	$	349,845	$	—	$	(90)	$	349,755
EAP risk-based		79,938		—		—		79,938
ASO		59,123		11,534		(83)		70,574
PBM, including dispensing		—		518,112		(4,567)		513,545
Medicare Part D		—		55,666		—		55,666
PBA		—		30,129		—		30,129
Formulary management		—		22,161		—		22,161
Other		—		611		—		611
Total net revenue	$	488,906	$	638,213	$	(4,740)	$	1,122,379

Type of Customer
Government	$	227,102	$	203,957	$	—	$	431,059
Non-government		261,804		434,256		(4,740)		691,320
Total net revenue	$	488,906	$	638,213	$	(4,740)	$	1,122,379

Timing of Revenue Recognition
Transferred at a point in time	$	—	$	573,778	$	(4,567)	$	569,211
Transferred over time		488,906		64,435		(173)		553,168
Total net revenue	$	488,906	$	638,213	$	(4,740)	$	1,122,379

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)







	Three Months Ended March 31, 2021
	Healthcare		Pharmacy Management		Elimination		Total
Major Service Lines
Behavioral & Specialty Health
Risk-based, non-EAP	$	373,442	$	—	$	(86)	$	373,356
EAP risk-based		88,120		—		—		88,120
ASO		71,448		11,817		(75)		83,190
PBM, including dispensing		—		538,796		(3,399)		535,397
Medicare Part D		—		176		—		176
PBA		—		49,882		—		49,882
Formulary management		—		29,183		—		29,183
Other		—		2,345		—		2,345
Total net revenue	$	533,010	$	632,199	$	(3,560)	$	1,161,649

Type of Customer
Government	$	256,292	$	156,038	$	—	$	412,330
Non-government		276,718		476,161		(3,560)		749,319
Total net revenue	$	533,010	$	632,199	$	(3,560)	$	1,161,649

Timing of Revenue Recognition
Transferred at a point in time	$	—	$	538,972	$	(3,399)	$	535,573
Transferred over time		533,010		93,227		(161)		626,076
Total net revenue	$	533,010	$	632,199	$	(3,560)	$	1,161,649

Per Member Per Month (“PMPM”) Revenue. Almost all of the Healthcare revenue and a small portion of the Pharmacy Management revenue is paid on a PMPM basis. PMPM revenue is inclusive of revenue from the Company’s risk, EAP and ASO contracts and primarily relates to managed care contracts for services such as the provision of behavioral healthcare, specialty healthcare or pharmacy management. PMPM contracts generally have a term of one year or longer, with the exception of government contracts where the customer can terminate with as little as 30 days’ notice for no significant penalty. All managed care contracts have a single performance obligation that constitutes a series for the provision of managed healthcare services for a population of enrolled members for the duration of the contract. The transaction price for PMPM contracts is entirely variable as it primarily includes PMPM fees associated with unspecified membership that fluctuates throughout the contract. In certain contracts, PMPM fees also include adjustments for things such as performance incentives, performance guarantees and risk shares. The Company generally estimates the transaction price using an expected value methodology and amounts are only included in the net transaction price to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved. The majority of the Company’s net PMPM transaction price relates specifically to its efforts to transfer the service for a distinct increment of the series (e.g. day or month) and is recognized as revenue in the month in which members are entitled to service. The remaining transaction price is recognized over the contract period (or portion of the series to which it specifically relates) based upon estimated membership as a measure of progress.

Pharmacy Benefit Management Revenue. The Company’s customers for PBM business, including pharmaceutical dispensing operations, are generally comprised of MCOs, employer groups and health plans. PBM relationships generally have an expected term of one year or longer. A master services arrangement (“MSA”) is executed by the Company and the customer, which outlines the terms and conditions of the PBM services to be provided. When a member in the customer’s organization submits a prescription, a claim is created which is presented for approval. The acceptance of each individual claim creates enforceable rights and obligations for each party and represents a separate contract. For each individual claim, the performance obligations are limited to the processing and adjudication of the claim, or dispensing of the products purchased. Generally, the transaction price for PBM services is explicitly listed in each contract and does not represent variable consideration. The Company recognizes PBM revenue, which consists of a negotiated prescription price (ingredient cost plus dispensing fee), co-payments and any associated administrative fees, when claims are adjudicated or the drugs are shipped. The Company recognizes PBM revenue on a gross basis

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

(i.e. including drug costs and co-payments) as it is acting as the principal in the arrangement, controls the underlying service, and is contractually obligated to its clients and network pharmacies, which is a primary indicator of gross reporting. In addition, the Company is solely responsible for the claims adjudication process, negotiating the prescription price for the pharmacy, collecting payments from the client for drugs dispensed by the pharmacy, and managing the total prescription drug relationship with the client’s members. If the Company enters into a contract where it is only an administrator, and does not assume any of the risks previously noted, revenue will be recognized on a net basis. For dispensing, at the time of shipment, the earnings process is complete; the obligation of the Company’s customer to pay for the specialty pharmaceutical drugs is fixed, and, due to the nature of the product, the member may neither return the specialty pharmaceutical drugs nor receive a refund.

Pharmacy Benefit Administration Revenue. The Company provides Medicaid pharmacy services to states and other government sponsored programs. PBA contracts are generally multi-year arrangements but include language regarding early termination for convenience without material penalty provisions that results in enforceable rights and obligations on a month-to-month basis. In PBA arrangements, the Company is generally paid a fixed fee per month to provide PBA services. In addition, some PBA contracts contain upfront fees that constitute a material right. For contracts without an upfront fee, there is a single performance obligation to stand ready to provide the PBA services required for the contracted period. The Company believes that the customer receives the PBA benefits each day from access to the claims processing activities, and has concluded that a time-based measure is appropriate for recognizing PBA revenue. For contracts with an upfront fee, the material right represents an additional performance obligation. Amounts allocated to the material right are initially recorded as a contract liability and recognized as revenue over the anticipated period of benefit of the material right, which generally ranges from 2 to 10 years.

Formulary Management Revenue. The Company administers formulary management programs for certain clients through which the Company coordinates the achievement, calculation and collection of rebates and administrative fees from pharmaceutical manufacturers on behalf of clients. Formulary management contracts generally have a term of one year or longer. All formulary management contracts have a single performance obligation that constitutes a series for the provision of rebate services for a drug, with utilization measured and settled on a quarterly basis, for the duration of the arrangement. The Company retains its administrative fee and/or a percentage of rebates that is included in its contract with the client from collecting the rebate from the manufacturer. While the administrative fee and/or the percentage of rebates retained is fixed, there is an unknown quantity of pharmaceutical purchases (utilization) during each quarter; therefore the transaction price itself is variable. The Company uses the expected value methodology to estimate the total rebates earned each quarter based on estimated volumes of pharmaceutical purchases by the Company’s clients during the quarter, as well as historical and/or anticipated retained rebate percentages. The Company does not record as rebate revenue any rebates that are passed through to its clients.

In relation to the Company’s PBM business, the Company administers rebate programs through which it receives rebates from pharmaceutical manufacturers that are shared with its customers. The Company recognizes rebates when the Company is entitled to them and when the amounts of the rebates are determinable. The amount recorded for rebates earned by the Company from the pharmaceutical manufacturers is recorded as a reduction of cost of goods sold.

Government EAP Risk-Based Revenue. The Company has certain contracts with federal customers for the provision of various managed care services, which are classified as EAP risk-based business. These contracts are generally multi-year arrangements. The Company’s federal contracts are reimbursed on either a fixed fee basis or a cost reimbursement basis. The performance obligation on a fixed fee contract is to stand ready to provide the staffing required for the contracted period. For fixed fee contracts, the Company believes the invoiced amount corresponds directly with the value to the customer of the Company’s performance completed to date; therefore, the Company is utilizing the “right to invoice” practical expedient, with revenue recognition in the amount for which the Company has the right to invoice.

The performance obligation on a cost reimbursement contract is to stand ready to provide the activity or services purchased by the customer, such as the operation of a counseling services group or call center. The performance obligation represents a series for the duration of the arrangement. The reimbursement rate is fixed per the contract; however, the level of activity (e.g., number of hours, number of counselors or number of units) is variable. A majority of the Company’s cost reimbursement transaction price relates specifically to its efforts to transfer the service for a distinct

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

increment of the series (e.g. day or month) and is recognized as revenue when the portion of the series for which it relates has been provided (i.e. as the Company provides hours, counselors or units of service).

In accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end of the current reporting period. Due to the nature of the contracts in the Company’s PBM business, these reporting requirements are not applicable. The majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation is part of a contract that has an original expected duration of one year or less; (ii) the right to invoice practical expedient; and (iii) variable consideration related to unsatisfied performance obligations that is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation, and the terms of that variable consideration relate specifically to our efforts to transfer the distinct service, or to a specific outcome from transferring the distinct service. For the Company’s contracts that pertain to these exemptions: (i) the remaining performance obligations primarily relate to the provision of managed healthcare services to the customers’ membership; (ii) the estimated remaining duration of these performance obligations ranges from the remainder of the current calendar year to three years; and (iii) variable consideration for these contracts primarily includes net PMPM fees associated with unspecified membership that fluctuates throughout the contract.

Accounts Receivable, Contract Assets and Contract Liabilities

Accounts receivable, contract assets and contract liabilities consisted of the following (in thousands, except percentages):


	December 31,		March 31,
	2020		2021		$ Change		% Change
Accounts receivable	$	799,803	$	824,067	$	24,264		3.0%
Contract assets		3,566		4,678		1,112		31.2%
Contract liabilities - current		6,772		6,968		196		2.9%
Contract liabilities - long-term		11,073		11,453		380		3.4%

Accounts receivable, which are included in accounts receivable, other current assets and other long-term assets on the consolidated balance sheets, increased by $24.3 million, mainly due to timing of receipts. Contract assets, which are included in other current assets on the consolidated balance sheets, increased by $1.1 million, mainly due to the timing of accrual of certain performance incentives. Contract liabilities – current, which are included in accrued liabilities on the consolidated balance sheets, increased by $0.2 million, mainly due to certain revenue payments received in advance. Contract liabilities – long-term, which are included in deferred credits and other long-term liabilities on the consolidated balance sheets, increased by $0.4 million mainly due to payments received for which recognition will be long term partially offset by certain balances which became current.

During the three months ended March 31 2021, the Company recognized revenue of $2.0 million that was included in current contract liabilities at December 31, 2020. The estimated timing of recognition of amounts included in contract liabilities at March 31, 2021 are as follows: 2021—$6.0 million; 2022—$4.0 million; 2023—$3.6 million; 2024 and beyond—$4.8 million. During the three months ended March 31, 2021, the revenue the Company recognized related to performance obligations that were satisfied, or partially satisfied, in previous periods was not material.

The Company’s accounts receivable consists of amounts due from customers throughout the United States. Collateral is generally not required. A majority of the Company’s contracts have payment terms in the month of service, or within a few months thereafter. The timing of payments from customers from time to time generates contract assets or contract liabilities; however, these amounts are immaterial.

The Company’s accounts receivable is net of an allowance for credit losses. The estimate of current expected credit losses on trade receivables considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management elected to disaggregate trade receivables into business segments due to risk characteristics unique to each platform given the individual lines of business and market. Pooling was further

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

disaggregated based on either geography or product type.

The Company leveraged historical write offs over a defined lookback period in deriving a historical loss rate. The expected credit loss model further considers current conditions and reasonable and supportable forecasts through the use of an adjustment for current and projected macroeconomic factors. Management identified appropriate macroeconomic indicators based on tangible correlation to historical losses, giving consideration to the location and risks associated with the Company’s customers.

Significant Customers

Customers exceeding ten percent of the consolidated Company’s net revenues

The Company had no customers that exceeded ten percent of the Company’s net revenues from continuing operations.

Customers exceeding ten percent of segment net revenues

The following customers generated in excess of ten percent of net revenues from continuing operations for the respective segment for the three months ended March 31, 2020 and 2021 (in thousands):


Segment	Term Date	2020		2021
Healthcare
Customer A	December 31, 2021	$	88,539	$	92,982
Customer B	December 31, 2022		49,438		55,486

Pharmacy Management
Customer C	March 31, 2024		98,617		88,651

Concentration of Business

The Company also has a significant concentration of business with various counties in the State of Pennsylvania (the “Pennsylvania Counties”) which are part of the Pennsylvania Medicaid program, with members under its contract with Centers for Medicare and Medicaid Services (“CMS”) and with various agencies and departments of the United States federal government. Net revenues from the Pennsylvania Counties in the aggregate totaled $137.0 million and $152.7 million for the three months ended March 31, 2020 and 2021, respectively. Net revenues from members in relation to its contracts with CMS in aggregate totaled $55.7 million and $0.2 million for the three months ended March 31, 2020 and 2021, respectively. As of December 31, 2020 and March 31, 2021, the Company had $69.6 million and $55.2 million, respectively, in net receivables associated with Medicare Part D from CMS and other parties related to this business. In May 2020, the Company announced its decision to exit the Part D business at the end of 2020. Net revenues from contracts with various agencies and departments of the United States federal government in aggregate totaled $69.9 million and $77.7 million for the three months ended March 31, 2020 and 2021, respectively.

The Company’s contracts with customers typically have stated terms of one to three years, and in certain cases contain renewal provisions (at the customer’s option) for successive terms of between one and two years (unless terminated earlier). Substantially all of these contracts may be immediately terminated with cause and many of the Company’s contracts are terminable without cause by the customer or the Company either upon the giving of requisite notice and the passage of a specified period of time (typically between 30 and 180 days) or upon the occurrence of other specified events. In addition, the Company’s contracts with federal, state and local governmental agencies generally are conditioned on legislative appropriations. These contracts generally can be terminated or modified by the customer if such appropriations are not made.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

Leases

The Company leases certain office space, distribution centers, land and equipment. We assess each contract to determine if it contains a lease. This assessment is based on (i) the right to control the use of an identified asset; (ii) the right to obtain substantially all of the economic benefits from the use of the identified asset; and (iii) the right to use the identified asset. The Company elected the short-term lease practical expedient; thus, leases with an initial term of twelve months or less are not capitalized and the expense is recognized on a straight-line basis. Most leases include one or more options to renew, with renewal terms that can extend the lease from one to ten years. The exercise of renewal options are at the sole discretion of the Company. Renewal options that the Company is reasonably certain to accept are recognized as part of the right-of-use (“ROU”) asset.

Operating leases are included in other long-term assets, accrued liabilities and deferred credits and other long-term liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, current debt, finance lease deferred financing obligations and long-term debt, finance lease and deferred financing obligations in the consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments per the lease. Operating lease ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. As the rate implicit in most of our leases is not readily determinable, the Company used its incremental borrowing rate to determine the present value of lease payments.

The following table shows the components of lease expenses for the three months ended March 31, 2021 (in thousands):


	Three Months Ended March 31, 2021
Operating lease cost	$	2,408
Finance lease cost:
Amortization of right-of-use asset		707
Interest on lease liabilities		166
Total finance lease cost		873
Short-term lease cost		40
Variable lease cost		224
Total lease cost		3,545
Sublease income		(7)
Net lease cost	$	3,538

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

The following table shows the components of the lease assets and liabilities as of March 31, 2021 (in thousands):


	March 31, 2021
Operating leases:
Other long-term assets	$	32,053

Accrued liabilities	$	10,597
Deferred credits and other long-term liabilities		33,626
Total operating lease liabilities	$	44,223

Finance leases:
Property and equipment, net	$	12,183

Current debt, finance lease and deferred financing obligations	$	4,455
Long-term debt, finance lease and deferred financing obligations		10,783
Total finance lease liabilities	$	15,238

The maturity dates of the Company’s leases as of March 31, 2021 are summarized below (in thousands):


	March 31, 2021
2021	$	11,819
2022		14,893
2023		12,399
2024		10,616
2025		5,358
2026 and beyond		5,556
Total lease payments		60,641
Less interest		(1,180)
Present value of lease liabilities	$	59,461

The following table shows the weighted average remaining lease term and discount rate as of March 31, 2021:


	March 31, 2021
Weighted average remaining lease term years
Operating leases		4.98
Finance leases		3.52
Weighted average discount rate
Operating leases		3.18%
Finance leases		4.40%

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

Supplemental cash flow information relating to leases is as follows (in thousands):


	Year ended March 31, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	4,661
Operating cash flows from finance leases		1,121
Financing cash flows from finance leases		166
Right-of-use asset obtained in exchange for new lease obligation
Operating leases		—
Finance leases		—

Fair Value Measurements

The Company has certain assets and liabilities that are required to be measured at fair value on a recurring basis. These assets and liabilities are to be measured using inputs from the three levels of the fair value hierarchy, which are as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3—Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including the Company’s data.

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s assets and liabilities that are required to be measured at fair value as of December 31, 2020 and March 31, 2021 (in thousands):


	December 31, 2020
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (1)	$	—	$	679,554	$	—	$	679,554
Investments:
U.S. Government and agency securities		42,399		—		—		42,399
Corporate debt securities		—		99,749		—		99,749
Certificates of deposit		—		1,311		—		1,311
Total assets held at fair value	$	42,399	$	780,614	$	—	$	823,013

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)


	March 31, 2021
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (2)	$	—	$	447,627	$	—	$	447,627
Investments:
U.S. Government and agency securities		332,403		—		—		332,403
Corporate debt securities		—		296,716		—		296,716
Certificates of deposit		—		1,311		—		1,311
Total assets held at fair value	$	332,403	$	745,654	$	—	$	1,078,057

(1)	Excludes $464.9 million of cash held in bank accounts by the Company.

(2)	Excludes $8.7 million of cash held in bank accounts by the Company.

For the three months ended March 31, 2021, the Company has not transferred any assets between fair value measurement levels.

The carrying values of financial instruments, including accounts receivable and accounts payable, approximate their fair values due to their short-term maturities. The fair value of the Notes (as defined below) of $387.4 million as of March 31, 2021 was determined based on quoted market prices and would be classified within Level 1 of the fair value hierarchy. The estimated fair value of the Company’s term loan of $158.8 million as of March 31, 2021 was based on current interest rates for similar types of borrowings and is in Level 2 of the fair value hierarchy. The estimated fair values may not represent actual values of the financial instruments that could be realized as of the balance sheet date or that will be realized in the future.

All of the Company’s investments are classified as “available-for-sale” and are carried at fair value.

Cash and Cash Equivalents

Cash equivalents are short-term, highly liquid interest-bearing investments with maturity dates of three months or less when purchased, consisting primarily of money market instruments. Book overdrafts are reflected within accounts payable on the balance sheets. At March 31, 2021, the Company had book overdrafts of $2.1 million. At March 31, 2021, the Company’s excess capital and undistributed earnings for the Company’s regulated subsidiaries of approximately $50 million are included in cash and cash equivalents.

Investments

If a debt security is in an unrealized loss position and the Company has the intent to sell the debt security, or it is more likely than not that the Company will have to sell the debt security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to other-than-temporary impairment losses recognized in income in the consolidated statements of comprehensive income. For impaired debt securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in other-than-temporary impairment losses recognized in net income and the non-credit component of the other-than-temporary impairment is recognized in other comprehensive income in the consolidated statements of comprehensive income.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

As of December 31, 2020 and March 31, 2021, there were no material unrealized losses that the Company determined to be other-than-temporary. No realized gains or losses were recorded for the three months ended March 31, 2020 or 2021. The following is a summary of short-term and long-term investments at December 31, 2020 and March 31, 2021 (in thousands):


	December 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
U.S. Government and agency securities	$	42,389	$	11	$	(1)	$	42,399
Corporate debt securities		99,861		3		(115)		99,749
Certificates of deposit		1,311		—		—		1,311
Total investments at December 31, 2020	$	143,561	$	14	$	(116)	$	143,459


	March 31, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
U.S. Government and agency securities	$	332,375	$	29	$	(1)	$	332,403
Corporate debt securities		296,833		14		(131)		296,716
Certificates of deposit		1,311		—		—		1,311
Total investments at March 31, 2021	$	630,519	$	43	$	(132)	$	630,430

The maturity dates of the Company’s investments as of March 31, 2021 are summarized below (in thousands):


	Amortized		Estimated
	Cost		Fair Value
2021	$	625,439	$	625,350
2022		5,080		5,080
Total investments at March 31, 2021	$	630,519	$	630,430

Income Taxes

The Company’s effective income tax rates from continuing operations were 122.8 percent and 27.7 percent for the three months ended March 31, 2020 and 2021, respectively. These rates differ from the applicable federal statutory income tax rate primarily due to state income taxes and permanent differences between book and tax income. The Company also accrues interest and penalties related to uncertain tax positions in its provision for income taxes. The significant effective income tax rate for the three months ended March 31, 2020 is primarily due to the impact of the non-deductible health insurance fee (“HIF”) relative to the reduced level of earnings of the period. Congress repealed the HIF effective for plan years after December 31, 2020.

The Company files a consolidated federal income tax return with its eighty-percent or more controlled subsidiaries. The Company and its subsidiaries also file income tax returns in various state and local jurisdictions.

The Coronavirus Aid, Relief, and Economic Security Act was signed into law on March 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law on December 27, 2020 and The American Rescue Plan Act of 2021 was signed March 11, 2021. All three acts provide widespread emergency relief for the economy and aid to corporations including several significant provisions related to taxes. As of March 31, 2021, the Company has not utilized (nor does it anticipate utilizing) any of the provisions that would result in a material impact on its results.

State Net Operating Loss Carryforwards

The Company and its subsidiaries have $75.0 million of net operating loss carryovers (“NOLs”) available to reduce state and local taxable income at certain subsidiaries in 2021 and subsequent years. Most of these NOLs will expire in 2021 through 2038 if not used and are subject to examination and adjustment by the respective tax authorities. In addition, the Company’s utilization of certain of these NOLs is subject to limitations as to the timing and use. Other

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

Summarized information related to the Company’s stock options for the three months ended March 31, 2021 is as follows:


		Weighted
		Average
		Exercise
	Options	Price
Outstanding, beginning of period	1,045,283	$	75.48
Granted	—		—
Forfeited	(19,960)		89.13
Exercised	(109,381)		68.26
Outstanding, end of period	915,942	$	76.05
Vested and expected to vest at end of period	914,068	$	76.07
Exercisable, end of period	816,244	$	77.24

Summarized information related to the Company’s nonvested restricted stock awards (“RSAs”) for the three months ended March 31, 2021 is as follows:


		Weighted
		Average
		Grant Date
	Shares	Fair Value
Outstanding, beginning of period	54,314	$	77.33
Awarded	—		—
Vested	—		—
Forfeited	—		—
Outstanding, ending of period	54,314		77.33

Summarized information related to the Company’s nonvested restricted stock units (“RSUs”) for the three months ended March 31, 2021 is as follows:


		Weighted
		Average
		Grant Date
	Shares	Fair Value
Outstanding, beginning of period	428,362	$	65.83
Awarded	275,619		92.85
Vested	(148,546)		67.77
Forfeited	(887)		70.40
Outstanding, ending of period	554,548		78.73

Grants of RSAs vest on the anniversary of the grant. In general, RSUs vest ratably on each anniversary over the three years subsequent to grant.

Summarized information related to the Company’s nonvested restricted performance stock units (“PSUs”) for the three months ended March 31, 2021 is as follows:


		Weighted
		Average
		Grant Date
	Shares	Fair Value
Outstanding, beginning of period	278,945	$	99.80
Awarded	—		—
Vested	—		—
Forfeited	(63,324)		141.61
Outstanding, end of period	215,621		87.51

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

Long-Term Debt and Finance Lease Obligations

The following table shows the components of debt and finance lease obligations, including the current component, at December 31, 2020 and March 31, 2021 (in thousands):


	December 31,		March 31,
	2020		2021
Senior Notes	$	359,632	$	359,656
Term loan		263,125		158,750
Other loan		2,154		2,154
Finance leases - land and equipment		16,359		15,238
Finance leases - software as service arrangements		1,298		1,288
Deferred loan costs		(4,192)		(3,861)
Total debt and finance lease obligations	$	638,376	$	533,225

Senior Notes

On September 22, 2017, the Company completed the public offering of $400.0 million aggregate principal amount of its 4.400% Senior Notes due 2024 (the “Notes”). The Notes are governed by an indenture dated as of September 22, 2017 (the “Base Indenture”), between the Company, as issuer, and U.S. Bank National Association, as trustee, and is supplemented by a first supplemental indenture dated as of September 22, 2017 (the “First Supplemental Indenture” together, with the Base Indenture, the “Indenture”), between the Company, as issuer, and U.S. Bank National Association, as trustee. Since the public offering, the Company purchased and subsequently retired $40.0 million of it’s Notes, of which $28.9 million was purchased and subsequently retired in March 2020 that resulted in a loss on retirement of $0.7 million that is included in interest expense. The Notes were issued at a discount and had a carrying value of $359.6 million and $359.7 million at December 31, 2020 and March 31, 2021, respectively.

The Notes bear interest payable semiannually in cash in arrears on March 22 and September 22 of each year, commencing on March 22, 2018, which rate is subject to an interest rate adjustment upon the occurrence of certain credit rating events. The interest rate on the Notes on March 31, 2021 was 4.900%. The Notes mature on September 22, 2024. The Indenture provides that the Notes are redeemable at the Company’s option, in whole or in part, at any time on or after July 22, 2024, at a redemption price equal to 100% of the principal amount of the Notes being redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption date.

The Indenture also contains certain covenants which restrict the Company’s ability to, among other things, create liens on its and its subsidiaries’ assets; engage in sale and lease-back transactions; and engage in a consolidation, merger or sale of assets.

Credit Agreement

On September 22, 2017, the Company entered into a credit agreement with various lenders that provides for a $400.0 million senior unsecured revolving credit facility and a $350.0 million senior unsecured term loan facility to the Company, as the borrower (the “2017 Credit Agreement”). On August 13, 2018, the Company entered into an amendment to the 2017 Credit Agreement, which extended the maturity date by one year. On February 27, 2019, the Company entered into a second amendment to the 2017 Credit Agreement, which amended the total leverage ratio covenant through December 31, 2019, and which was necessary in order for the Company to remain in compliance with the terms of the 2017 Credit Agreement. The 2017 Credit Agreement is scheduled to mature on September 22, 2023.

Under the 2017 Credit Agreement, the annual interest rate on the loan borrowing is equal to (i) in the case of base rate loans, the sum of an initial borrowing margin of 0.500 percent plus the higher of the prime rate, one-half of one percent in excess of the overnight “federal funds” rate, or the Eurodollar rate for one month plus 1.000 percent, or (ii) in the case of Eurodollar rate loans, the sum of an initial borrowing margin of 1.500 percent plus the Eurodollar rate for the selected interest period. The borrowing margin is subject to adjustment based on the Company’s debt rating as provided

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

by certain rating agencies. The Company has the option to borrow in base rate loans or Eurodollar rate loans at its discretion. The Company has elected to borrow in Eurodollar rate loans that currently have a borrowing margin of 1.75 percent plus the Eurodollar rate for the selected interest period. For three months ended March 31, 2021, the weighted average interest rate on the term loan facility was approximately 2.01 percent. The interest rate on the term loan facility was 1.86% on March 31, 2021. The term loan facility balance under the 2017 Credit Agreement totaled $263.1 million and $158.8 million as of December 31, 2020 and March 31, 2021, respectively.

In March 2021, the Company made voluntary term loan repayments of $100.0 million. As of March 31, 2021, the contractual maturities, totaling $158.8 million of the term loan under the 2017 Credit Agreement were as follows: 2021—$0.0 million; 2022—$0.0 million; and 2023—$158.8 million. Due to the timing of working capital needs, the Company will periodically borrow from the revolving loan under the 2017 Credit Agreement. At December 31, 2020 and March 31, 2021, the Company had no revolving loans, resulting in borrowing capacity of $400.0 million under the 2017 Credit Agreement. Included in long-term debt, finance lease and deferred financing obligations are deferred loan and bond issuance costs as of December 31, 2020 and March 31, 2021 of $4.2 million and $3.9 million, respectively.

Letter of Credit Agreement

On August 22, 2017, the Company entered into a Continuing Agreement for Standby Letters of Credit with The Bank of Tokyo-Mitsubishi UFJ, Ltd. (“BTMU”), as issuer (the “L/C Agreement”), under which BTMU, at its sole discretion, may provide stand-by letter of credit to the Company. The Company had letters of credit outstanding under the L/C Agreement as of December 31, 2020 and March 31, 2021 of $32.1 million and $33.0 million, respectively.

Finance Lease and Deferred Financing Obligations

There were $16.4 million and $15.2 million of finance lease and deferred financing obligations at December 31, 2020 and March 31, 2021, respectively. The Company’s finance lease and deferred financing obligations represent amounts due under leases for certain properties, computer software (acquired prior to the prospective adoption of ASU 2015-05 on January 1, 2016) and equipment. The recorded gross cost of finance lease assets was $43.0 million and $43.0 million at December 31, 2020 and March 31, 2021, respectively.

Redeemable Non-Controlling Interest

As of March 31, 2021, the Company held a 70% equity interest in Aurelia Health, LLC (“Aurelia”). The other shareholders of Aurelia have the right to exercise put options, requiring the Company to purchase up to 33.3% of the remaining shares during the thirty-day period beginning on January 15, 2022 and each subsequent anniversary thereafter. In addition, for the thirty-day period beginning on January 15, 2022 and each subsequent anniversary thereafter, the Company has the right to purchase 33.3% of the remaining shares (“call option”). The redemption price for these put and call options is based on a fixed multiple of the trailing twelve-month EBITDA at the redemption date. Non-controlling interests with redemption features, such as put options, that are not solely within the Company’s control are considered redeemable non-controlling interests. Redeemable non-controlling interest is considered to be temporary and is therefore reported in a mezzanine level between liabilities and stockholders’ equity on the Company’s consolidated balance sheet at the greater of the initial carrying amount adjusted for the non-controlling interest’s share of net income or loss or its redemption value. The carrying value of the non-controlling interest as of December 31, 2020 and March 31, 2021 was $33.1 million and $33.3 million, respectively. The Company evaluates the redemption value on a quarterly basis. If the redemption value is greater than the carrying value, the Company will adjust the carrying amount of the non-controlling interest to equal the redemption value at the end of each reporting period. Under this method, this is viewed at the end of the reporting period as if it were also the redemption date for the non-controlling interest. The Company will reflect redemption value adjustments in the earnings per share (“EPS”) calculation if redemption value is in excess of the carrying value of the non-controlling interest. As of March 31, 2021, the carrying value of the non-controlling interest exceeded the redemption value and therefore no adjustment to the carrying value was required.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

NOTE B—Net Income per Common Share Attributable to Magellan Health, Inc.

The following table reconciles income attributable to common shareholders (numerator) and shares (denominator) used in the computations of net income per share attributable to common shareholders (in thousands, except per share data) for the three months ended March 31:


	Three Months Ended
	March 31,
	2020		2021
Numerator:
Net (loss) income from continuing operations	$	(1,070)	$	28,509
Income (loss) from discontinued operations, net of tax		19,320		(682)
Net income	$	18,250	$	27,827
Denominator:
Weighted average number of common shares outstanding—basic		24,728		25,948
Common stock equivalents—stock options		61		186
Common stock equivalents—RSAs		21		19
Common stock equivalents—RSUs		50		196
Common stock equivalents—PSUs		—		201
Common stock equivalents—employee stock purchase plan		9		3
Weighted average number of common shares outstanding—diluted		24,869		26,553
Net (loss) income per common share—basic:
Continuing operations	$	(0.04)	$	1.10
Discontinued operations		0.78		(0.03)
Consolidated operations	$	0.74	$	1.07
Net (loss) income per common share—diluted:
Continuing operations	$	(0.04)	$	1.07
Discontinued operations		0.78		(0.03)
Consolidated operations	$	0.74	$	1.04

The weighted average number of common shares outstanding for the three months ended March 31, 2020 and 2021 were calculated using outstanding shares of the Company’s common stock. Common stock equivalents included in the calculation of diluted weighted average common shares outstanding for the three months ended March 31, 2020 and 2021 represent stock options to purchase shares of the Company’s common stock, RSAs, RSUs, PSUs and stock purchased under the Employee Stock Purchase Plan.

The Company had additional potential dilutive securities outstanding representing 1.4 million and 0.3 million options for the three months ended March 31, 2020 and 2021, respectively, that were not included in the computation of dilutive securities because they were anti-dilutive for the period. Had these shares not been anti-dilutive, all of these shares would not have been included in the net income attributable to common shareholder per common share calculation as the Company uses the treasury stock method of calculating diluted shares.

NOTE C—Business Segment Information

The accounting policies of the Company’s segments are the same as those described in Note A—“General.” The Company evaluates performance of its segments based on profit or loss from operations before stock compensation expense, depreciation and amortization, interest expense, interest and other income, changes in the fair value of contingent consideration recorded in relation to acquisitions, gain on sale of assets, special charges or benefits, and income taxes (“Segment Profit”). Management uses Segment Profit information for internal reporting and control purposes and considers it important in making decisions regarding the allocation of capital and other resources, risk assessment and employee compensation, among other matters. Healthcare subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain of Healthcare’s customers. In addition, Pharmacy Management provides pharmacy benefits management for the Company’s employees covered under its medical plan. As

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

such, revenue, cost of goods sold and direct service costs and other related to these arrangements are eliminated. The Company’s segments are defined in Note A—“General.”

The following tables summarize, for the periods indicated, operating results by business segment (in thousands):


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		Consolidated
Three Months Ended March 31, 2020
Managed care and other revenue	$	488,906	$	64,435	$	(173)	$	553,168
PBM revenue		—		573,778		(4,567)		569,211
Cost of care		(349,108)		—		—		(349,108)
Cost of goods sold		—		(537,574)		4,333		(533,241)
Direct service costs and other		(105,936)		(81,866)		(16,439)		(204,241)
Stock compensation expense (1)		1,761		2,107		1,929		5,797
Segment Profit (Loss)	$	35,623	$	20,880	$	(14,917)	$	41,586


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		Consolidated
Three Months Ended March 31, 2021
Managed care and other revenue	$	533,010	$	93,227	$	(161)	$	626,076
PBM revenue		—		538,972		(3,399)		535,573
Cost of care		(379,191)		—		—		(379,191)
Cost of goods sold		—		(495,593)		3,223		(492,370)
Direct service costs and other		(114,993)		(104,596)		(11,432)		(231,021)
Legal matter settlement		—		9,000		—		9,000
Stock compensation expense (1)		2,519		2,696		1,842		7,057
Segment Profit (Loss)	$	41,345	$	43,706	$	(9,927)	$	75,124

(1)

Stock compensation expense, changes in the fair value of contingent consideration recorded in relation to acquisitions and impairment of intangible assets are included in direct service costs and other operating expenses; however, these amounts are excluded from the computation of Segment Profit.

The following table reconciles income from continuing operations before income taxes to Segment Profit from continuing operations (in thousands):


	Three Months Ended
	March 31,
	2020		2021
Income from continuing operations before income taxes	$	4,692	$	39,414
Stock compensation expense		5,797		7,057
Depreciation and amortization		23,358		21,417
Interest expense		8,958		6,426
Interest and other income		(1,219)		(341)
Special charges		—		1,151
Segment Profit from continuing operations	$	41,586	$	75,124

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

NOTE D—Commitments and Contingencies

Legal

The Company’s operating activities entail significant risks of liability. From time to time, the Company is subject to various actions and claims arising from the acts or omissions of its employees, network providers or other parties. In the normal course of business, the Company receives reports relating to deaths and other serious incidents involving patients for whom the Company provides managed care services. Such incidents occasionally give rise to malpractice, professional negligence and other related actions and claims against the Company or its network providers. Many of these actions and claims received by the Company seek substantial damages and, therefore, require the Company to incur significant fees and costs related to their defense. The Company is also subject to or party to certain class actions and other litigation and claims relating to its operations or business practices including employment practices, and privacy and data protection.

The Company maintains a program of insurance coverage against a broad range of risks in the Company’s business, including certain of the class actions and other litigation and claims asserted against the Company, subject to deductibles and self-insured retentions as is described more fully in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 26, 2021. The Company has recorded reserves that, in the opinion of management, are adequate to cover litigation, claims or assessments that have been or may be asserted against the Company, and for which the outcome is probable and reasonably estimable. Management believes that the resolution of such litigation and claims will not have a material adverse effect on the Company’s financial condition or results of operations; however, there can be no assurance in this regard.

Regulatory Issues

The managed healthcare industry is subject to numerous laws and regulations. The subjects of such laws and regulations cover, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirements, information privacy and security, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Over the past several years, government activity has increased with respect to investigations and/or allegations concerning possible violations of fraud and abuse and false claims statutes and/or regulations by healthcare organizations and insurers. Entities that are found to have violated these laws and regulations may be excluded from participating in government healthcare programs, subjected to fines or penalties or required to repay amounts received from the government for previously billed patient services. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.

The Company is subject to various federal, state and other laws and rules regarding the use, storage, protection and disclosure of confidential member and protected personal or health information, including the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”) and other applicable laws. The Company has experienced data security incidents resulting in disclosure of confidential or protected personal or health information. We have notified government agencies as appropriate and are cooperating with investigations and requests for information. Noncompliance with any applicable privacy or data security laws and regulations could result in enforcement actions, fines, penalties, and reputational and financial harm to the Company.

In addition, regulators of certain of the Company’s subsidiaries may exercise certain discretionary rights under regulations including increasing their supervision of such entities, requiring additional restricted cash or other security or seizing or otherwise taking control of the assets and operations of such subsidiaries.

The Company is subject to certain federal laws and regulations in connection with its contracts with the federal government. These laws and regulations affect how the Company conducts business with its federal agency customers and may impose added costs on its business. The Company’s failure to comply with federal procurement laws and regulations could cause it to lose business, incur additional costs and subject it to a variety of civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, harm to reputation, suspension of

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

payments, fines, and suspension or debarment from doing business with federal government agencies. The Company’s wholly owned subsidiary, Armed Forces Services Corporation (“AFSC”), conducts business with federal agency customers and federal contractors to such agencies. The Company investigated, with the assistance of outside counsel, matters relating to compliance by AFSC with Small Business Administration ( “SBA”) regulations and other federal laws applicable to government contractors and reported findings to the SBA and the Department of Defense, including facts indicating violations of SBA regulations and other federal laws, such as the Anti-Kickback Act, by former AFSC executives, none of which was disclosed to Magellan prior to its acquisition of AFSC. The Company voluntarily responded to government requests for further information regarding the Company’s investigation. As a result of the Company's disclosure and the ensuing government investigation, a former AFSC executive pleaded guilty in the United States District Court for the Eastern District of Virginia to one count of honest services fraud, and at sentencing in September 2020, the Court ordered the former AFSC executive to pay restitution to AFSC as the victim of that offense. In June 2020, the United States Attorney’s Office for the Eastern District of Virginia (“U.S. Attorney’s Office”) informed the Company of a civil investigation regarding the Company and AFSC related to potential violations of the False Claims Act and/or the Anti-Kickback Act also stemming from the matters self-disclosed by the Company. While the Company believes that it has responded appropriately by self-reporting findings regarding matters that incepted prior to its acquisition of AFSC in order to mitigate the risk of adverse consequences, should the Company or AFSC be held responsible for the reported conduct in a proceeding initiated by the U.S. Attorney’s Office, SBA, Department of Defense and/or other federal agencies, we may be required to pay damages and/or penalties and AFSC could be suspended or debarred from government contracting. Management believes that the resolution of such investigations will not have a material adverse effect on the Company’s financial condition or results of operations; however, there can be no assurance in this regard. AFSC generated approximately 2.4% of the Company’s total revenue from continuing operations for the year ended December 31, 2020 and three months ended March 31, 2021.

Stock Repurchases

The Company’s board of directors has previously authorized a series of stock repurchase plans. Stock repurchases for each such plan could be executed through open market repurchases, privately negotiated transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deemed appropriate. Each stock repurchase program could be limited or terminated at any time without prior notice. Pursuant to the terms of the Merger Agreement, the Company suspended its stock repurchase programs on January 4, 2021, the date we announced our planned merger with Centene.

The Company’s board of directors approved, and subsequently amended, a stock repurchase plan which authorizes the Company to purchase up to $400 million of its outstanding common stock through November 15, 2021 (the “Repurchase Program”). As of March 31, 2021, the remaining capacity under the Repurchase Program was $186.3 million. Stock repurchases under the programs may be carried out from time to time in open market transactions (including blocks) or in privately negotiated transactions. The timing of repurchases and the actual amount purchased will depend on a variety of factors including the market price of the Company’s shares, general market and economic conditions, and other corporate considerations. Repurchases may be made pursuant to plans intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, which could allow the Company to purchase its shares during periods when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Repurchases are expected to be funded from working capital and anticipated cash from operations. The repurchase authorization does not require the purchase of a specific number of shares and is subject to suspension or termination by the Company’s board of directors at any time.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

Pursuant to the Stock Repurchase Program, the Company made purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):


	Total Number	Average
	of Shares	Price Paid		Aggregate
Period	Purchased	per Share		Cost
October 26, 2015 - December 31, 2015	345,044	$	53.46	$	18.4
January 1, 2016 - December 31, 2016	1,828,183		58.40		106.8
January 1, 2017 - December 31, 2017	280,140		77.67		21.8
January 1, 2018 - December 31, 2018	844,872		74.59		63.0
January 1, 2019 - December 31, 2019	60,901		61.15		3.7
January 1, 2020 - December 31, 2020	—		—		—
January 1, 2021 - March 31, 2021	—		—		—
	3,359,140			$	213.7

The Company made no share repurchases from April 1, 2021 through April 23, 2021.

Acquisition of Aurelia Health, LLC

Pursuant to the December 18, 2020 purchase agreement (the “Bayless Agreement”) between Bella Vista Enterprises, Inc., Aurelia Health, LLC and the Company, on December 21, 2020 the Company acquired 70 percent of the outstanding membership interests of Aurelia Health, LLC and its subsidiary Michael B. Bayless, LLC (collectively “Bayless”) (the “Bayless Acquisition”).

The base purchase price for the Bayless Acquisition per the Bayless Agreement was $78.4 million. The Company reports the results of operations of Bayless within its Healthcare segment. During the three months ended March 31, 2021, the Company made measurement period adjustments of $0.1 million to increase goodwill related to the Bayless Acquisition.

NOTE F—Discontinued Operations

Magellan Complete Care – Stock and Asset Purchase Agreement

On December 31, 2020, the Company completed the sale of its MCC Business to Molina, pursuant to a Stock and Asset Purchase Agreement, dated as of April 30, 2020, by and between the Company and Molina, for cash in the amount of $850 million plus closing adjustments of $158 million (subject to post-closing adjustments, if any), and the assumption by Molina of liabilities of the MCC Business.

In connection with the MCC Sale, the Company and Molina have entered into commercial agreements for certain behavioral health, utilization management and related services to be provided by the Company to Molina and the MCC Business. These commercial agreements are subject to termination in connection with the Company’s pending Merger with Centene and may not be implemented. In addition, the parties entered into a transition services agreement pursuant to which the Company and certain of its affiliates provide, or cause third parties to provide, certain services to accommodate the transition of the MCC business to Molina.

The foregoing description of the Purchase Agreement and the MCC Sale does not purport to be complete and is qualified in its entirety by the terms and conditions of the Purchase Agreement, which was filed as Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q which was filed with the SEC on May 11, 2020, and any related agreements.

The accounting requirements for reporting a business to be divested as a discontinued operation were met during the second quarter of 2020. Accordingly, the accompanying consolidated financial statements for all periods presented reflect the MCC business as a discontinued operation.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

The following table summarizes the components of income from discontinued operations that is included in the Company’s consolidated income statements for the three months ended March 31, 2020 and 2021 (in thousands):


	Three Months Ended
	March 31,
	2020		2021
Managed care and other revenue	$	720,034	$	—
Costs and expenses:
Cost of care		602,534		—
Direct service costs and other operating expenses (1)(2)(3)		84,497		926
Depreciation and amortization		5,326		—
Interest expense		71		—
Interest and other income		(2,540)		—
Total costs and expenses		689,888		926
Income (loss) from discontinued operation before income taxes		30,146		(926)
Provision (benefit) for income taxes		10,826		(244)
Net income (loss) from discontinued operations	$	19,320	$	(682)

(1)	Includes stock compensation expense of $260 for the three months ended March 31, 2020.

(2)	Includes divestiture related expenses of $605 for the three months ended March 31, 2020.

(3)	Includes changes in estimates and transition support services for the three months ended March 31, 2021.

The Company has retained corporate overhead expenses previously allocated to MCC of $6.7 million for the three months ended March 31, 2020.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

NOTE G—Special Charges

In 2020, the Company established a transformation office which has an initiative (the “Transformation Initiative”) to lower our operating costs and reinvest in our business by improving and automating processes, leveraging technology, consolidating platforms and reducing any friction our customers, providers and members experience when doing business with us. As part of the Transformation Initiative, the Company is in the process of restructuring certain operating activities which has resulted in the Company recording an adjustment to severance of $0.2 million for the three months ended March 31, 2021, within special charges in the consolidated statement of comprehensive income.

In addition, the Company reevaluated its current office lease footprint. Recoverability of existing operating right-of-use lease assets, and the related fixed assets held at the office locations, to be held and used are measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Any lease terminations or abandonments initiated as a result of the Transformation Initiative that result in an impairment of such right-of-use assets and the location’s related fixtures will be reported as special charges. For the three months ended March 31, 2021, lease terminations and abandonments resulted in the recognition of non-cash pre-tax impairment of $1.3 million, within special charges in the consolidated statement of comprehensive income. The impairment charge reduced the carrying value of these assets to their estimated fair value. In the future, if events or market conditions affect the estimated fair value to the extent that a long-lived asset is impaired, the Company will adjust the carrying value of these long-lived assets in the period in which the impairment occurs. In addition, the Company accrued various lease shutdown costs of $0.1 million for the three months ended March 31, 2021, within special charges in the consolidated statement of comprehensive income.

The following table summarizes the components of special charges that are included in the Company’s consolidated statement of comprehensive income for the three months ended March 31, 2021 (in thousands):




Non-cash related special charges
Right-of-use assets	$	1,263
Fixed assets		14
Total non-cash related special charges		1,277

Cash related special charges
Employee severance and termination benefits		(209)
Lease shutdown costs		83
Total cash related special charges		(126)
Total special charges	$	1,151

A roll-forward of the Transformation Initiative liabilities is as follows (in thousands):


	Balance						Balance
	December 31,						March 31,
	2020		Additions		Payments		2021
Employee severance and termination benefits	$	10,983	$	(209)	$	(1,019)	$	9,755
Lease shutdown costs		610		83		(83)		610
	$	11,593	$	(126)	$	(1,102)	$	10,365

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Business Overview

The Company is engaged in the healthcare management business, and is focused on meeting needs in areas of healthcare that are fast growing, highly complex and high cost, with an emphasis on special population management. The Company provides services to health plans and other MCOs, employers, labor unions, various military and governmental agencies, TPAs, consultants and brokers. The Company’s business is divided into three segments, based on the services it provides and/or the customers that it serves. See Item 1—“Business” for more information on the Company’s business segments.

Results of Operations

The following table summarizes, for the periods indicated, operating results from continuing operations (in thousands):


	Three Months Ended
	March 31,				Change
Continuing Operations	2020		2021		'20 vs '21
Statement of Operations Data:
Net revenue	$	1,122,379	$	1,161,649	3.5%
Cost of Care		349,108		379,191	8.6%
Cost of goods sold		533,241		492,370	(7.7)%
Direct service costs and other operating expenses (1)		204,241		231,021	13.1%
Legal matter settlement		—		(9,000)	N/A
Depreciation and amortization		23,358		21,417	(8.3)%
Interest expense		8,958		6,426	(28.3)%
Interest and other income		(1,219)		(341)	(72.0)%
Special charges		—		1,151	N/A
Income before income taxes		4,692		39,414	740.0%
Provision for income taxes		5,762		10,905	89.3%
Net (loss) income from continuing operations	$	(1,070)	$	28,509	2764.4%

(1)	Includes stock compensation expense of $5,797 and $7,057 for the three months ended March 31, 2020 and 2021, respectively.

Quarter ended March 31, 2021 (“Current Year Quarter”) compared to Quarter ended March 31, 2020 (“Prior Year Quarter”)

Net revenue, Cost of care, Cost of goods sold and Direct service costs and other operating expenses

Net revenue, cost of care, cost of goods sold and direct service costs and other operating expense variances are addressed within the segment results that follow.

Depreciation and amortization

Depreciation and amortization expense decreased by 8.3 percent or $1.9 million from the Prior Year Quarter to the Current Year Quarter, primarily due to asset maturities, partially offset by normal asset additions after the Prior Year Quarter.

Interest expense

Interest expense decreased by 28.3 percent or $2.5 million from the Prior Year Quarter to the Current Year Quarter primarily due to lower interest rates and lower debt balances.

Table of Contents

The following table summarizes, for the periods indicated, operating results for the Healthcare segment (in thousands):


	Three Months Ended
	March 31,				Change
Healthcare Segment Results	2020		2021		'20 vs '21
Risk-based, non-EAP	$	349,845	$	373,442	6.7%
EAP risk-based		79,938		88,120	10.2%
ASO		59,123		71,448	20.8%
Managed care and other revenue		488,906		533,010	9.0%
Cost of care		349,108		379,191	8.6%
		139,798		153,819	10.0%
Direct service costs and other		105,936		114,993	8.5%
		33,862		38,826	14.7%
Stock compensation expense		1,761		2,519	43.0%
Segment Profit	$	35,623	$	41,345	16.1%

Direct service cost as % of revenue		21.7%		21.6%
MLR Behavioral & Specialty Health risk		83.6%		85.1%
MLR Behavioral & Specialty Health EAP risk		71.1%		69.7%

Membership
Risk (1)		10,329		10,647	3.1%
EAP risk		14,129		13,869	(1.8)%
ASO		24,529		24,931	1.6%
		48,987		49,447	0.9%

(1)

May include some duplicate count of membership for customers that contract with Magellan for both behavioral and other specialty management services.

Current Year Quarter compared to the Prior Year Quarter

Managed care and other revenue

Net revenue increased by 9.0 percent or $44.1 million from the Prior Year Quarter to the Current Year Quarter. The increase in revenue is primarily due to favorable rate and membership changes of $35.4 million, revenue from acquisitions that occurred after the Prior Year Quarter of $11.1 million, new contracts implemented after (or during) the Prior Year Quarter of $10.5 million, revenue impact of favorable prior period medical claims development recorded in the Prior Year Quarter of $4.5 million and other net favorable variances of $5.0 million. These increases were partially offset by terminated contracts of $11.5 million, the revenue impact of program changes of $6.1 million net recorded for HIF fee in the Prior Year Quarter of $4.3 million, and the revenue impact of unfavorable prior period medical claims development recorded in the Current Year Quarter of $0.5 million.

Cost of care

Cost of care increased by 8.6 percent or $30.1 million from the Prior Year Quarter to the Current Year Quarter. The increase is primarily due to rate and membership changes of $20.8 million, cost of care for acquisitions that occurred after the Prior Year Quarter of $5.7 million, favorable prior period care development recorded in the Prior Year Quarter of $4.5 million and care trends and other unfavorable variances of $14.5 million. The increases were partially offset by terminated contracts of $7.8 million, program changes of $6.2 million, and net favorable prior period medical claims development recorded in the Current Year Quarter of $1.4 million. Cost of care as a percentage of risk revenue (excluding EAP business) increased from 83.6 percent in the prior year quarter to 85.1 percent in the Current Year Quarter, mainly due to costs related to new contracts implemented.

Direct service costs and other

Direct service costs increased 8.5 percent or $9.1 million from the Prior Year Quarter to the Current Year Quarter primarily due to an increase in allocated corporate expenses. Direct services costs decreased as a percentage of

Table of Contents

revenue from 21.7 percent in the Prior Year Quarter to 21.6 percent in the Current Year Quarter primarily due to the previously discussed revenue increases.

Pharmacy Management

The Pharmacy Management segment comprises products and solutions that provide clinical and financial management of pharmaceuticals paid under medical and pharmacy benefit programs. Pharmacy Management’s services include: (i) PBM services; (ii) PBA for state Medicaid and other government sponsored programs; (iii) pharmaceutical dispensing operations; (iv) clinical and formulary management programs; (v) medical pharmacy management programs; and (vi) programs for the integrated management of specialty drugs. Pharmacy Management’s services are provided under contracts with health plans, employers, state Medicaid programs, and other government agencies.

The following table summarizes, for the periods indicated, operating results for the Pharmacy Management segment (in thousands, except state count):


	Three Months Ended
	March 31,				Change
Pharmacy Segment Results	2020		2021		'20 vs '21
Formulary management	$	22,161	$	29,183	31.7%
PBA and other		42,274		64,044	51.5%
Managed care and other revenue		64,435		93,227	44.7%
PBM, including dispensing		518,112		538,796	4.0%
Medicare Part D		55,666		176	(99.7)%
PBM revenue		573,778		538,972	(6.1)%
Total net revenue		638,213		632,199	(0.9)%
Cost of goods sold		537,574		495,593	(7.8)%
		100,639		136,606	35.7%
Direct service costs and other		81,866		104,596	27.8%
		18,773		32,010	70.5%
Stock compensation expense		2,107		2,696	28.0%
Legal matter settlement		—		9,000	100.0%
Segment Profit	$	20,880	$	43,706	109.3%

Direct service cost as % of revenue		12.8%		16.5%
COGS as % of PBM revenue		93.7%		92.0%

Pharmacy Operational Statistics
Adjusted commercial network claims		6,740		6,195
Adjusted PBA claims		17,831		12,801
Total adjusted claims		24,571		18,996

Generic dispensing rate		87.2%		89.7%
Commercial PBM covered lives		1,760		486
Medical pharmacy covered lives		16,046		16,081
Total states and DC that participate in PBA		26		26

Current Year Quarter compared to the Prior Year Quarter

Managed care and other revenue

Managed care and other revenue increased by 44.7 percent or $28.8 million from the Prior Year Quarter to the Current Year Quarter primarily due to increased government pharmacy revenue of $19.8 million mainly due to increased membership, formulary management revenue of $8.4 million mainly due to utilization and other favorable variances of $0.6 million.

Table of Contents

PBM revenue

PBM revenue decreased by 6.1 percent or $34.8 million from the Prior Year Quarter to the Current Year Quarter. The decrease is primarily due to terminated contracts of $55.1 million and is partially offset by increased membership and utilization of $19.1 million and other net favorable variances of $1.2 million.

Cost of goods sold

Cost of goods sold decreased by 7.8 percent or $42.0 million from the Prior Year Quarter to the Current Year Quarter. This decrease is primarily due to terminated contracts of $55.9 million and is partially offset by increase in membership and utilization of $13.9 million. As a percentage of the portion of net revenue that relates to PBM, cost of goods sold decreased from 93.7 percent in the Prior Year Quarter to 92.0 percent in the Current Year Quarter, mainly due to business mix.

Direct service costs and other

Direct service costs increased by 27.8 percent or $22.7 million from the Prior Year Quarter to the Current Year Quarter primarily due to an increase in allocated corporate expenses and start-up costs associated with a new contract implementation. Direct service costs increased as a percentage of revenue from 12.8 percent in the Prior Year Quarter to 16.5 percent in the Current Year Quarter primarily due to new contract implementation costs.

Legal matter settlement

In the Current Year Quarter, the Company recognized a $9.0 million recovery in connection with the resolution of a legal matter.

Corporate Segment

The Corporate segment of the Company is comprised primarily of amounts not allocated to the Healthcare and Pharmacy Management segments, and that are largely associated with costs related to being a publicly traded company.

The following table summarizes, for the periods indicated, operating results for the Corporate segment (in thousands):


	Three Months Ended
	March 31,				Change
Corporate Segment & Eliminations	2020		2021		'20 vs '21
Managed care and other revenue	$	(173)	$	(161)	(6.9)%
PBM revenue		(4,567)		(3,399)	(25.6)%
Cost of goods sold		4,333		3,223	(25.6)%
		(407)		(337)	(17.2)%
Direct service costs and other		16,439		11,432	(30.5)%
		(16,846)		(11,769)	(30.1)%
Stock compensation expense		1,929		1,842	(4.5)%
Segment Loss	$	(14,917)	$	(9,927)	(33.5)%

Current Year Quarter compared to the Prior Year Quarter

The Corporate segment loss decreased by 33.5 percent or $5.0 million from the Prior Year Quarter to the Current Year Quarter, mainly due to stranded corporate overhead expenses in the Prior Year Quarter related to the sale of the MCC Business. As a percentage of revenue, the Corporate segment loss decreased slightly from 1.3 percent in the Prior Year Quarter to 0.9 percent in the Current Year Quarter, mainly due increased revenue.

Inter segment revenues and expenses

Healthcare subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain Healthcare customers. In addition, Pharmacy Management provides pharmacy benefits management for the Company’s employees covered under its medical plan. As such, revenue, cost of goods sold and direct service costs and other related to these arrangements are eliminated within the Corporate segment.

Table of Contents

Non-GAAP Measures

The Company reports its financial results in accordance with GAAP; however, the Company’s management also assesses business performance and makes business decisions regarding the Company’s operations using certain non-GAAP measures.

In addition to Segment Profit, as defined above, the Company also uses adjusted net income attributable to Magellan (“Adjusted Net Income”) and adjusted net income per common share attributable to Magellan on a diluted basis (“Adjusted EPS”). Adjusted Net Income and Adjusted EPS reflect certain adjustments made for acquisitions completed after January 1, 2013 to exclude non-cash stock compensation expense resulting from restricted stock purchases by sellers, changes in the fair value of contingent consideration, amortization of identified acquisition intangibles, as well as impairment of identified acquisition intangibles, special charges and any impact related to the sale of MCC. The Company believes these non-GAAP measures provide a more useful comparison of the Company’s underlying business performance from period to period and are more representative of the earnings capacity of the Company. Non-GAAP financial measures disclosed, such as Segment Profit, Adjusted Net Income and Adjusted EPS, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.

The following table reconciles income from continuing operations before income taxes to Segment Profit from continuing operations (in thousands):


	Three Months Ended
	March 31,
	2020		2021
Income from continuing operations before income taxes	$	4,692	$	39,414
Stock compensation expense		5,797		7,057
Depreciation and amortization		23,358		21,417
Interest expense		8,958		6,426
Interest and other income		(1,219)		(341)
Special charges		—		1,151
Segment Profit from continuing operations	$	41,586	$	75,124

The following table reconciles net (loss) income from continuing operations to Adjusted Net Income from continuing operations (in thousands):


	Three Months Ended
	March 31,
	2020		2021
Net (loss) income from continuing operations	$	(1,070)	$	28,509
Adjustments
Stock compensation expense		—		246
Amortization of acquired intangibles		9,686		8,059
Special charges		—		1,151
Tax impact		(2,605)		(2,492)
Adjusted Net Income from continuing operations	$	6,011	$	35,473

Table of Contents

The following table reconciles net income from continuing operations per common share—diluted to Adjusted EPS from continuing operations:


	Three Months Ended
	March 31,
	2020		2021
Net (loss) income from continuing operations per common share—diluted	$	(0.04)	$	1.07
Adjustments
Stock compensation expense		—		0.01
Amortization of acquired intangibles		0.39		0.30
Special charges		—		0.04
Tax impact		(0.10)		(0.09)
Adjusted EPS from continuing operations	$	0.25	$	1.33

Outlook—Results of Operations

The Company’s Segment Profit and net income are subject to significant fluctuations from period to period. These fluctuations may result from a variety of factors such as those set forth under Item 1A—“Risk Factors” as well as a variety of other factors including: (i) changes in utilization levels by enrolled members of the Company’s risk-based contracts, including seasonal utilization patterns; (ii) contractual adjustments and settlements; (iii) retrospective membership adjustments; (iv) timing of implementation of new contracts, enrollment changes and contract terminations; (v) pricing adjustments upon contract renewals (and price competition in general); (vi) the timing of acquisitions; (vii) changes in estimates regarding medical costs and IBNR; (viii) the timing of recognition of pharmacy revenues, including rebates; and (ix) changes in the estimates of contingent consideration.

A portion of the Company’s business is subject to rising care costs due to an increase in the number and frequency of covered members seeking healthcare services and higher costs of such services. Many of these factors are beyond the Company’s control. Future results of operations will be heavily dependent on management’s ability to obtain customer rate increases that are consistent with care cost increases and/or to reduce operating expenses.

Interest Rate Risk. Changes in interest rates affect interest income earned on the Company’s cash equivalents and investments, as well as interest expense on the variable interest rate borrowings under the 2017 Credit Agreement. In addition, interest rates on the Notes are subject to adjustment upon the occurrence of certain credit rating events. Based on the amount of cash equivalents and investments, the borrowing levels under the 2017 Credit Agreement and the principal amount of the Notes as of March 31, 2021, a hypothetical 10 percent increase or decrease in the interest rate associated with these instruments, with all other variables held constant, would not materially affect the Company’s future earnings and cash outflows.

Historical—Liquidity and Capital Resources

Operating Activities. The Company reported net cash provided by operating activities of $31.7 million and net cash used in operating activities of $77.9 million for the Prior Year Quarter and the Current Year Quarter, respectively. The $109.6 million decrease in operating cash flows from the Prior Year Quarter is mainly attributable to unfavorable working capital changes, increased tax payments and lower interest income collected.

The net unfavorable impact of working capital changes between periods totaled $106.6 million. For the Prior Year Quarter, operating cash flows were impacted by net unfavorable working capital changes of $33.6 million, mainly attributable to the timing of receivable and payables. For the Current Year Quarter, operating cash flows were impacted by net unfavorable working capital changes of $140.2 million, mainly attributable to the timing of receivables and payables.

In relation to continuing operations, the Company reported net cash used in operating activities of $4.1 million for the Prior Year Quarter and net cash used in operating activities of $77.9 million for the Current Year Quarter. The decrease is mainly due to timing of accounts receivable and other working capital changes.

Investing Activities. The Company utilized $15.7 million and $19.5 million during the Prior Year Quarter and the Current Year Quarter, respectively, for capital expenditures. The additions related to hard assets (equipment,


		Page No.
	PART I — Financial Information:
Item 1:	Financial Statements	2
	Consolidated Balance Sheets—December 31, 2020 and March 31, 2021	2
	Consolidated Statements of Comprehensive Income —For the Three Months Ended March 31, 2020 and 2021	3
	Consolidated Statements of Changes in Stockholders’ Equity—For the Three Months Ended March 31, 2020 and 2021	4
	Consolidated Statements of Cash Flows—For the Three Months Ended March 31, 2020 and 2021	5
	Notes to Consolidated Financial Statements	6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	39
Item 4:	Controls and Procedures	40
	PART II — Other Information:
Item 1:	Legal Proceedings	40
Item 1A:	Risk Factors	40
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3:	Defaults Upon Senior Securities	41
Item 4:	Mine Safety Disclosures	41
Item 5:	Other Information	41
Item 6:	Exhibits	41
Exhibit Index		42
Signatures		43


Exhibit Number		Description of Exhibit
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished).
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished).
101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the cover page, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) related notes.
104		Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.


Date: April 30, 2021	Magellan Health, Inc. (Registrant)

	By:	/s/ David P. Bourdon
		David P. Bourdon
		Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)